French government may water down 75 percent tax after setback

PARIS (Reuters) - The derailment of President Francois Hollande’s 75 percent millionaires’ tax presents a chance to water down a scheme which hurt France’s image with investors but the Socialist leader is unlikely to give up without a fight.

French President Francois Hollande (C) speaks to the journalists as he visits the Rungis wholesale market near Paris December 27, 2012. REUTERS/Benoit Tessier

Hollande pledged to press ahead with a redrafted tax on the wealthy next year after the Constitutional Council’s decision on Saturday to strike down the emblematic rate on income over 1 million euros (813 thousand pounds).

But the Socialist president, who won office in May, avoided referring specifically to the 75 percent rate which has made some of France’s wealthy, including film star Gerard Depardieu, announce they will move abroad.

“We will still ask more of those who have the most,” Hollande said in a televised New Year’s address on Monday, without providing details of the new proposal.

Among bankers at least, expectations are growing that the tax may look very different when the government comes back with a revised plan even if the original had strong public backing.

“I suspect this tax will be shelved,” said Philippe Gudin, a France economist for Barclays and a former Treasury official.

“For the (low amount of) revenue it would raise, the outcry it has provoked and the damage it has done to France’s image, it would be more sensible if it were quietly buried.”

The Council said the tax was unfair as it would hit married couples where only one partner earned above a million euros but would not affect couples where each earned just under a million.

Opinion polls show that six in 10 French people back the tax. But while it would have affected only 2,000-3,000 people and raised just a few hundred million euros a year, criticism from the business sector and high earners has been incessant.

Hollande finds himself stuck between trying to appease investors who see him as anti-business and showing voters he remains serious about making the rich cough up more taxes.

Political analyst Olivier Duhamel said the government could accept the Council’s ruling by making the tax applicable to households, rather than individuals, and possibly raising the income threshold to 2 million euros.

Alternatively, it could using the rejection as justification for ditching the whole idea. “In politics, when things get difficult, you are stuck with unpleasant choices,” Duhamel said.

The ruling has little effect on public finances but it has embarrassed the government just weeks after a public relations fiasco over attempts to rescue two idled steel furnaces.

Hollande will be wary of compounding his problems. “Giving up the 75 percent tax without a fight would be an admission of weakness,” said Stephane Rozes of the CAP political consultancy.

French media have reported even one of Hollande’s economic advisers muttered in private that a 75 percent tax rate amounted to turning France into “Cuba without the sunshine”.

Deutsche Bank’s Gilles Moec also believed Hollande had little to gain by picking a fight with his own supporters but might go for the higher 2 million euro threshold. “If they scrap it entirely they don’t gain much and they get into trouble with their left wing. This would be a compromise,” he said.

“BLINKERED STATE”

Hollande has been walking a tightrope since taking power in May as he tries to square election promises with the financial market demands without infuriating left-wingers in government.

Famous for having once said that he disliked rich people, he vowed from day one to fight Europe’s focus on austerity policies and partially reversed a law that raised the retirement age.

After six months in power, Hollande announced market-friendly moves to raise sales taxes and fund tax relief for companies, explaining that the crisis made this necessary.

He also capitulated to furious entrepreneurs who revolted over plans to raise capital gains taxes in 2013, agreeing to scrap the measure for small business owners.

“This march forward has not been without bumps or setbacks,” Hollande said. “I recognise that, but I have set a calendar of reforms to come out of this crisis faster and stronger.”

Finance Minister Pierre Moscovici told Reuters in an interview that the French were aware of challenges facing the country as the government seeks to reverse a rising trend in unemployment by the end of 2013.

“We need to reform, which requires effort, and Francois Hollande is aware of the challenges,” he said. “But success lies at the end of the road and the marker of that success is this (unemployment) goal.”

Hollande seems to be struggling, however, to find the right path to tread. The 75 percent tax reversal is the latest in a series of communications gaffes.

Hollande was ridiculed in November after London Mayor Boris Johnson, a British Conservative, likened his government to revolutionaries for threatening to nationalise a steelworks where ArcelorMittal planned to shut blast furnaces.

In the end, the government secured only a promise that furnace workers would get jobs elsewhere, infuriating unions.

France's President Francois Hollande gestures as he arrives to deliver his New Year's speech at the Elysee Palace in Paris, December 31, 2012. REUTERS/Lionel Bonaventure/Pool

The tax setback is a new blow. Senate finance commission head Jean Arthuis said Hollande’s government had been punished for its “dogmatic blinkered state and its amateurism”.

Critics said Hollande was now in a corner over how to tweak the tax to make it apply to households - like regular income tax - without making it apply to tens of thousands of couples.

“This is a major legal mistake that could clearly have been avoided,” Thomas Piketty, an economist who helped inspire the 75 percent tax, told Liberation. “The Socialist Party had 10 years in opposition to prepare a coherent fiscal reform. We get the impression they haven’t done enough work on this crucial issue.” ($1 = 0.7564 euros)